Long-Run Health Care Cost Drivers

Long-Run Health Care Cost Drivers: One of our best graduate students here at Berkeley--Marit Rehavi--just came by with a truly depressing thought. No matter which subtribe of economists you think is correct in the intellectual health-care wars, the world is moving in directions that make the favored policies of both factions less likely to work in the future.

On health care issues, you see, economists divide into two subtribes depending on whether they think the big problem with America's health system today is adverse selection or moral hazard--two terms from the insurance industry.

Those economists on the left tend to think that the real big problem with American health care is adverse selection: Those who know they are healthy and likely to stay that way skimp on purchasing insurance. Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible. Ultimately, this line of thought goes, single-payer national health insurance is the best option, for the administrative and bureaucratic inefficiencies introduced are vastly outweighed by the reduction in the gaming the system that goes on under our current plan where profits are made by those insurance companies that are best able to avoid covering the sick.

Those economists on the right tend to think that the real big problem with American health care is moral hazard: that patients soak up scarce and valuable doctor and nurse time even when there is no benefit to the visit, and that doctors use up vast resources conducting tests and procedures that do patients very little good. And, this side argues, patients do this because their copays don't penalize them enough for wasting health professionals' time and doctors do this because their bottom lines don't suffer when they carry out barely effective, expensive, and inappropriate procedures. Sometimes economists on this side say these market failures are all the government's fault: the subsidy the government provides for low-deductible and first-dollar insurance. Sometimes economists on this side say that these market failures arise because of human irrationality: we half-intelligent jumped-up East African Plains Apes have a psychological propensity to overvalue certainty and thus to pay much more for first-dollar and low-deductible health insurance than we should.

The prescription of the right-wing subtribe of economists is to create hard incentives: regulate the insurance market so that the only policies allowable are high-deductible and fixed-reimbursement polices that make doctors feel in their purses the costs of the procedures they recommend, and that make patients feel in their purses the costs of the health professionals' time that they pointlessly soak up. Let insurance companies segment their market so that patients who make unhealthy lifestyle choices--who smoke, who get fat, who drink enough to pickle their livers, who give themselves diabetes by drinking Pepsi--feel the costs of those lifestyle choices in their insurance premiums. If the right-wing diagnosis is correct, this prescription would do a lot of good, because the gains from curbing moral hazard would be much bigger than the side-effects: dry mouth and additional adverse selection. But if the right-wing economists are wrong, this prescription is destructive. It means that those who have already drawn the big black X in life's lottery--those likely to die early and painfully of some dread disease--find their bad luck amplified by the workings of the health insurance market: not only do they die early and painfully, they die poor leaving their children poor as well.

The prescription of the left-wing subtribe of economists is nearly the opposite: it is to soften incentives as a side effect of eliminating opportunities for moral hazard by recognizing that the market for health care financing simply does not work very well, and cannot be made to work very well. If the left-wing diagnosis is correct, the prescription would do a lot of good. Nobody likes going to the doctor or undergoing invasive and usually painful costly medical procedures. The gain by eliminating adverse selection would be much bigger than the side-effects: frequent urination and a small amount of additional moral hazard. But if the left-wing economists are wrong, this prescription is destructive. Health care spending growth will accelerate as the few curbs on doing-everything-for-everybody drop away, and eventually a single-payer government with a budget constraint steps in to ration health care and to ration it badly and destructively, providing the wrong care to the wrong people.

Given these sharp disagreements between very smart, public-spirited, and hard-working economist like Uwe Reinhardt and Jon Gruber on the left hand and Kate Baicker and Mark McClellan on the other, one might despair. One would be further tempted to despair when one remembers that these issues will not be settled by locking Uwe, John, Kate, and Mark in a room until they reach agreement but by 535 legislators who are best described as a ping-pong ball, with the pharmaceutical and the doctor lobbies as the paddles.

And now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices. Nationalizing the health insurance sector won't diminish the costs in 2050 of treating the lung cancer that the twenty year-old staring smoking today will develop. Increasing copays won't reduce the costs of treating the diabetes that the five year-old today with a two-coke and three-twinkie-a-day habit will develop in 2045.

Neither prescription will be very effective as a remedy to cost drivers like these. Our irresistible force is our belief that health care should not be rationed by price. Our immovable object is the unwillingness of American taxpayers to be turned into an IV drip bag for the health sector that the health sector itself controls. What happens when these meet is a crisis, which cannot be averted no matter whether we adopt the right-wing prescription, adopt the left-wing prescription, or muddle through.

Is there a magic bullet to reduce these chronic-diseases-of-aging-life-style-driven sources of secularly rising health care costs? I can see only one chance: the nanny state. Lectures every half hour, on every TV channel, by the surgeon general and the assembled celebrities of America, telling us to: lose weight, exercise more, don't smoke, don't drink to excess, watch your fats, watch your sugars, eat your vegetables, et cetera--remember that you are an East African Plains Ape that did not evolve to live in a world where fats and carbohydrates were abundant and smoke damaging to your lungs was laced with nicotine.

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Long-Run Health Care Cost Drivers

Long-Run Health Care Cost Drivers: One of our best graduate students here at Berkeley--Marit Rehavi--just came by with a truly depressing thought. No matter which subtribe of economists you think is correct in the intellectual health-care wars, the world is moving in directions that make the favored policies of both factions less likely to work in the future.

On health care issues, you see, economists divide into two subtribes depending on whether they think the big problem with America's health system today is adverse selection or moral hazard--two terms from the insurance industry.

Those economists on the left tend to think that the real big problem with American health care is adverse selection: Those who know they are healthy and likely to stay that way skimp on purchasing insurance. Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible. Ultimately, this line of thought goes, single-payer national health insurance is the best option, for the administrative and bureaucratic inefficiencies introduced are vastly outweighed by the reduction in the gaming the system that goes on under our current plan where profits are made by those insurance companies that are best able to avoid covering the sick.

Those economists on the right tend to think that the real big problem with American health care is moral hazard: that patients soak up scarce and valuable doctor and nurse time even when there is no benefit to the visit, and that doctors use up vast resources conducting tests and procedures that do patients very little good. And, this side argues, patients do this because their copays don't penalize them enough for wasting health professionals' time and doctors do this because their bottom lines don't suffer when they carry out barely effective, expensive, and inappropriate procedures. Sometimes economists on this side say these market failures are all the government's fault: the subsidy the government provides for low-deductible and first-dollar insurance. Sometimes economists on this side say that these market failures arise because of human irrationality: we half-intelligent jumped-up East African Plains Apes have a psychological propensity to overvalue certainty and thus to pay much more for first-dollar and low-deductible health insurance than we should.

The prescription of the right-wing subtribe of economists is to create hard incentives: regulate the insurance market so that the only policies allowable are high-deductible and fixed-reimbursement polices that make doctors feel in their purses the costs of the procedures they recommend, and that make patients feel in their purses the costs of the health professionals' time that they pointlessly soak up. Let insurance companies segment their market so that patients who make unhealthy lifestyle choices--who smoke, who get fat, who drink enough to pickle their livers, who give themselves diabetes by drinking Pepsi--feel the costs of those lifestyle choices in their insurance premiums. If the right-wing diagnosis is correct, this prescription would do a lot of good, because the gains from curbing moral hazard would be much bigger than the side-effects: dry mouth and additional adverse selection. But if the right-wing economists are wrong, this prescription is destructive. It means that those who have already drawn the big black X in life's lottery--those likely to die early and painfully of some dread disease--find their bad luck amplified by the workings of the health insurance market: not only do they die early and painfully, they die poor leaving their children poor as well.

The prescription of the left-wing subtribe of economists is nearly the opposite: it is to soften incentives as a side effect of eliminating opportunities for moral hazard by recognizing that the market for health care financing simply does not work very well, and cannot be made to work very well. If the left-wing diagnosis is correct, the prescription would do a lot of good. Nobody likes going to the doctor or undergoing invasive and usually painful costly medical procedures. The gain by eliminating adverse selection would be much bigger than the side-effects: frequent urination and a small amount of additional moral hazard. But if the left-wing economists are wrong, this prescription is destructive. Health care spending growth will accelerate as the few curbs on doing-everything-for-everybody drop away, and eventually a single-payer government with a budget constraint steps in to ration health care and to ration it badly and destructively, providing the wrong care to the wrong people.

Given these sharp disagreements between very smart, public-spirited, and hard-working economist like Uwe Reinhardt and Jon Gruber on the left hand and Kate Baicker and Mark McClellan on the other, one might despair. One would be further tempted to despair when one remembers that these issues will not be settled by locking Uwe, John, Kate, and Mark in a room until they reach agreement but by 535 legislators who are best described as a ping-pong ball, with the pharmaceutical and the doctor lobbies as the paddles.

And now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices. Nationalizing the health insurance sector won't diminish the costs in 2050 of treating the lung cancer that the twenty year-old staring smoking today will develop. Increasing copays won't reduce the costs of treating the diabetes that the five year-old today with a two-coke and three-twinkie-a-day habit will develop in 2045.

Neither prescription will be very effective as a remedy to cost drivers like these. Our irresistible force is our belief that health care should not be rationed by price. Our immovable object is the unwillingness of American taxpayers to be turned into an IV drip bag for the health sector that the health sector itself controls. What happens when these meet is a crisis, which cannot be averted no matter whether we adopt the right-wing prescription, adopt the left-wing prescription, or muddle through.

Is there a magic bullet to reduce these chronic-diseases-of-aging-life-style-driven sources of secularly rising health care costs? I can see only one chance: the nanny state. Lectures every half hour, on every TV channel, by the surgeon general and the assembled celebrities of America, telling us to: lose weight, exercise more, don't smoke, don't drink to excess, watch your fats, watch your sugars, eat your vegetables, et cetera--remember that you are an East African Plains Ape that did not evolve to live in a world where fats and carbohydrates were abundant and smoke damaging to your lungs was laced with nicotine.

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